The End of the American Century, Global Change and China

The following is a slightly edited version of my lecture in Shanghai on May 9 on "The End of the American Century, Global Change and China." The lecture was accompanied by a powerpoint presentation with much of the data and evidence I referred to, and the lecture was translated simultaneously into Chinese (see previous post on details of the forum).
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Perhaps it is no accident that the first translation of The End of the American Century is into Chinese, since China is the most prominent “rising power” mentioned in a book that is primarily directed at the decline of the one power that has been dominant for the last half-century. The role of China is also important because of the huge and growing size of the Chinese economy, and the multifaceted interdependence of China and the United States. In my book, I see raw military power as increasingly irrelevant both for the United States and for other countries, as the biggest problems the world is facing—climate change, environmental deterioration, pandemic disease, poverty, terrorism, etc.—are simply not susceptible to military solutions. Addressing those problems requires international cooperation. Such cooperation also facilitates trade and economic growth, which are keys to reducing the poverty and inequality that provide the breeding ground for discontent and violence.

I understand that most of you are involved in business, trade or finance in various capacities, so I will focus my remarks today on economic issues, at least those in the United States. Given the scope and speed of the global financial collapse, economic issues are, indeed, on the minds of just about everyone. The U.S. economy is a core aspect of my treatment of the decline of the U.S. as a global power—but it is by no means the only one. And while I do, necessarily, devote a lot of attention to economics, I am myself a political scientist rather than economist. What I do in my book, and want to do here, is to look at the varied and interrelated dimensions of U.S. decline. Because it is the symbiosis of all these aspects of U.S. and global change that makes the current situation so distinctive, even unique. Many analysts in the U.S. see the current economic predicament of the country to be similar to those of other economic downturns in recent decades. I believe the combination of U.S. economic, social and political decay, and the simultaneous rise of other countries in the world—like China—means a much different outcome and future for the United States.

For those of you who have not yet read my book, let me provide a summary of the overall approach. Keep in mind that the English version of my book went to press in early 2008, well before the ongoing economic collapse of the United States, and appeared in English in the fall, just as the scale of the catastrophe was unfolding. The essential argument of my book is that the U.S. has come to the end of its long period of economic affluence and global dominance. Most Americans—even, at last, the experts!—are starting to see the handwriting on the wall now, as we see collapsing around us the stock market, housing markets, job markets, banks, manufacturing, retail stores and news media. These are all interrelated, and driven by longer term problems that pressed against us before President Obama, and even before the disastrous administration of George W. Bush. The 20th Century, often called “The American Century” had already come to a close before the awful terrorist attacks of September 11.

America’s decline is a result of three convergent and interrelated phenomena: the deterioration of the U.S. itself—especially in the economic realm but in many other respects as well; the increasing influence of other global powers; and the changed nature of global interactions. The decade-long convergence of all three of these phenomena marks a global shift of historic proportions, and one that defines a much different place in the world for the United States and its citizens.

The central aspects of U.S. decline is economic. The federal government, the state governments, and most households have been living beyond their means for a generation, and the result is unprecedented levels of government, household, mortgage and consumer debt. Americans citizens spend and consume more than they earn, and the United States as a whole consumes more than it produces. This has posed a burden on the rest of the world that is unsustainable in the long run. I will come back to these economic issues in a few minutes.

The U.S. has also fallen behind other countries in many other areas where we flourished during The American Century. The educational system, once considered the world’s best, now ranks near the bottom among developed countries. Health care shows the worst results, on average, of any of the countries of the Organization for Economic Cooperation and Development (OECD). The U.S. has higher poverty rates, more violence, and greater inequality than almost any other OECD country. Our roads, highways, bridges and dams—most built near the beginning of the American Century—are decrepit and in need of major investments. Even the country’s vaunted political system, tarnished by private interests, money and low levels of political participation, is no longer a model for emulation much of anywhere in the world.
While the U.S. has been on a long slide, both with our domestic health and our international reputation, other countries and regions have been moving ahead, and gaining confidence and clout. China is now the world’s workshop, and has the fastest sustained economic growth of any country in history. The European Union has brought together 27 countries into a peaceful and healthy community—an economic bloc bigger than the U.S. and with many countries more successful than the U.S. in providing health care, education and welfare to their citizens. Many other countries are increasingly prosperous, confident and assertive, to the point of challenging U.S. dominance in their own parts of the globe.

In addition, globalization has changed the rules of the game. Labor and capital move more easily around the world, making it more difficult for the U.S.—or any government—to control economic development. Organizations that span national borders—international and non-governmental organizations, multinational corporations, terrorist groups--are for good or ill challenging the power and influence of countries. All of this make global politics more complex, and less subject to the influence of single nation-states, especially go-it-alone ones as the U.S. has been for the last eight years.

President Obama is making noble efforts to bolster America’s global reputation and reverse its decline, but in my view, it is too little and too late. The rest of the world has already caught up or caught on, and is not much interested in the U.S. resuming its global leadership. Furthermore, what the world needs now, in confronting problems--of global warming, pollution, nuclear proliferation, terrorism, poverty and epidemic disease—is cooperation and compromise rather than “leadership.”

In my book, I buttress all of these assertions by using data, showing both trend data over time in the U.S., and data comparing the U.S. to other wealthy countries. In both kinds of comparisons the US does not fare very well. Let’s look at some of these figures, focusing on the economic ones.

The End of the American Century can be seen as a descendant of the 1985 book by the Yale historian Paul Kennedy, The Rise and Fall of the Great Powers. Kennedy studied the big empires of the past—Rome, Britain, Spain, among others—and concluded that each of them foundered on what he called “imperial overstretch.” This is the tendency for big powers to become so “stretched” by foreign ventures, expansion or wars that they end up bankrupting themselves at home, leading to social and economic decay. Kennedy predicted in the mid-1980s that the same thing would happen to the Soviet Union, and even hinted that the U.S. was also vulnerable to the problem of imperial overstretch and debt. When he published that book in 1985, the U.S. federal debt was about 45% of the economy (GDP), which Kennedy said was historically unprecedented for any large power in peacetime. The only exception was France on the eve of the French Revolution.

But look what happened in the two decades after the publication of Kennedy’s book. The US federal debt mushroomed from less than half of GDP to over two-thirds of GDP. The problem escalated with the administration of G.W. Bush, who sharply increased defense spending for the wars in Iraq and Afghanistan, while simultaneously cutting income taxes. When I wrote my book in 2007-2008, I thought the size of the debt was alarming, as it approached $10 trillion. But then the financial crisis hit the United States, the stock market collapsed (by half), unemployment skyrocketed, and Congress and the President approved huge financial bailout plans that sent the federal debt even higher. The federal budget of the new Obama administration, calling for huge new spending on education, health care, infrastructure and the environment (all vitally needed but terribly expensive), is sending the federal debt burdens to levels unseen since World War II. Within a few years, even according to the President’s optimistic assumptions, the gross federal debt will reach 100% of the size of the economy. I should point out that these huge debt levels do not even include the “unfunded liabilities” for Social Security and Medicare, which would add another $45 trillion. The government has put aside no money to pay for retirement and health care benefits for senior citizens, who will increase greatly in numbers as the “baby boomers” begins retiring in the next few years.

The federal government debt, though, is only one aspect of the multiple levels of indebtedness in the United States. Another aspect of this is the trade deficit. For most of the years since World War II, the U.S. maintained a rough balance of exports and imports. But during the 1990s, as imports soared and exports declined, the trade balance got seriously out of whack, reaching records levels in both absolute terms and as a percent of GDP. The huge increase in imports, many of them from China, helped the U.S. standard of living, but was not matched by similar productivity, output or exports from the US.

A third aspect of US debt—what some called the “triple deficit”—is household and consumer debt. Over the last two decades, Americans have built up record levels of consumer debt. The household savings rate (savings as a percent of household income) have always been relatively low in the US compared to other countries, but in the last twenty years have declined sharply. By 2005, this number had dipped below zero for the first time since the Great Depression. Most Americans have saved almost nothing for their retirement years, at a time when most employers are no longer providing retirement pensions for their employees. This presages a sharp decline in the standard of living, and dramatic increases in poverty, as the population ages. On this dimension too, the US compares unfavorably with most other wealthy countries.

The American propensity to spend rather than save is partly a culture phenomenon—the strong strain of materialism in U.S. culture—but also partly due to the increasing influence of the financial services sector in the U.S. in recent years. Manufacturing has declined steadily as a share of GDP in the U.S. The U.S. doesn’t actually produce much any more. Increasingly, manufacturing has been replaced by financial services. Banks and mortgage companies make money by getting people to borrow, and therefore go into debt. One small but telling example of this is the dozens of credit card offers that most Americans get in the mail. I get several such offers a week, for example. But so do many of my students, most of whom have no income at all! As a consequence, credit card debt is at a record high, and the average household has about $10,000 in credit card debt. Consumer and household debt overall totals about $13 trillion—the size of the entire U.S. economy.

The bottom line is that the U.S. has become a consumer society, consuming far more than we produce or earn, and this can not be sustained. Consumption accounts for almost three-quarters of GDP in the US—a record for any large economy in modern history. As we have seen, much of that consumption is fueled by debt. Americans will have to save more and spend less. This will entail a substantial contraction in the U.S. economy, as workers are laid off and consumer spending declines. Unfortunately, this will also mean a decline in tax revenues, just at the time when government spending is increasing. The U.S. stock market has already declined by 50% since its highs of 2008. The economy as a whole is shrinking, at the fastest rate since the Great Depression. Most economists think that this economic decline will bottom out fairly soon, and that the worst is over. But given the problems I have mentioned, I think it is possible that the US GDP could contract by as much as one-third—roughly the same decline that the U.S. experienced during the height of the Great Depression in 1929-1933. It took the U.S. economy about 4 years to recover from that decline.

U.S. economic decline is just one element—albeit an important one—of the diminishing U.S. power, influence and reputation in the world. Global surveys show little enthusiasm around the world now for “American-style” democracy, for the American way of doing business, or for the spread of US customs and ideas. People in most countries think it would be better if another country rivaled the U.S. in military power. And a recent BBC poll of people in 21 countries found many more believing that the U.S. role in the world was “mostly negative” rather than “mostly positive.” China ranked slightly ahead of the U.S. on this question.

At the same time that U.S. power and influence is diminishing, some other countries are growing stronger, more confident and more assertive. Possible rivals for influence with the U.S. include the “BRIC” countries—Brazil, Russia, India and China—and also the European Union, which now includes 27 countries with a population and GNP larger than that of the United States. The “rising” BRIC countries have had very fast rates of economic growth in recent years and, at least until the economic crisis this year, were expected to perform even better in the near future. By another measure, the growth in stock market value, these rising powers are also outpacing the U.S. The U.S. stock market grew exceptionally fast from 2002-2007, rising at an average rate of about 15% per year. But each of the BRIC countries experienced stock market growth at least twice that of the U.S. in those years. As a percent of the world’s total stock market, the U.S. share has shrunk by almost half over the last thirty years.

Perhaps even more astonishing is the declining relative influence of U.S. banks, a phenomenon accelerated, of course, by the collapse of so many financial institutions in the U.S. Measured by market capitalization, a year ago four of the largest banks in the world were American. Now only two are. And four of the top ten are now Chinese!

These changes in the U.S. and the rest of the world signal a fundamental transformation of global politics and economics, and will require adjustments by people and governments alike around the world. For the United States and its citizens, these changes will be particularly wrenching. The U.S. economy will decline—probably by a lot, as will the standard of living in the U.S. For Americans used to a rising tide of affluence and spending, this will be a difficult adjustment. And it will also be difficult for Americans, psychologically, to deal with our diminished stature in the globe. Many changes are necessary to help restore America’s economic, social and political health. It seems to me that President Obama is cognizant of these needs, and is moving amazingly rapidly to address them. But the task is a difficult one, and a long-term one.

I am not really in a position to suggest what will happen, or should happen, in China. That is for you to decide, not me! But I was told me you would be interested in how I see all of this affecting China, so let me just mention a few things. First, of all, as should be obvious from my presentation, it seems to me that China is going to have to rely less on the U.S. market for helping fuel China’s economic growth. Americans will simply have to spend less, which means buying less of China’s many exports. It would seem that this would require, and offer the opportunity, for Chinese manufacturers to focus more on the domestic Chinese market, which will inevitably improve the standard of living of people in China. (This is an argument also made by Paul Krugman during his recent visit to China).

Even so, the U.S. and China both need each other for the economic health and development of both countries. And the rest of the world needs these two big powers to cooperate in solving global issues of trade, the environment, poverty, terrorism, nuclear proliferation, etc. So the interdependence of the two countries should continue and increase. China’s growing economy and international influence comes with increasing global responsibilities along these lines as well. China, for example, has now surpassed the United States as the leading emitter of carbon gasses that contribute to global warming. In my mind, global warming is the single greatest threat to the globe, and it requires serious work and attention. The problem can not be solved without the participation and cooperation of the U.S. and China.

Due to what has happened in the U.S., in China, and in the global community, China should by now certainly be considered an equal partner with the U.S. and other big powers in helping to shape this new global environment. I believe, from what your leaders say, that China is ready to play a bigger role in the world. And with a new, enlightened leadership in Washington, I am hoping the feelings will be mutual.